By Ann Saphir
A surge in U.S. job growth has financial markets betting the Federal Reserve will follow last month's half-point interest rate reduction with smaller moves, and ignited a debate over whether the policy rate ends up at a higher level than previously expected.
Financial markets are reacting to the Labor Department report that showed employers added 254,000 jobs in September, exceeding expectations, and led to a decline in the unemployment rate to 4.1%.
Traders are now pricing in quarter-point reductions instead of another upsized interest rate reduction, with an end point to the rate-cutting at somewhere between 3.25% and 3.75% by the middle of next year.
Chicago Fed President Austan Goolsbee praised the strong labor market data but emphasized the need for further rate cuts to ensure the labor market stays strong and inflation remains around the Fed's 2% target.
Analysts see the jobs report as reason for optimism about economic growth, but still expect further, gradual rate cuts ahead to support the economy.
Expectations could change before the Fed's next policy meeting in November, depending on fresh data on inflation and the job market.
The Fed aims to recalibrate the policy rate as inflation approaches its 2% goal and the labor market stabilizes.
Overall, the strong jobs report has shifted market expectations on the size and pace of future rate cuts, signaling potential economic growth and upside risk to consumer spending and GDP growth forecasts.
Analysis: The surge in U.S. job growth has implications for the Federal Reserve's interest rate decisions and the overall economy. As the Fed considers further rate cuts to support economic growth, investors should monitor future job market data and inflation trends to gauge the direction of monetary policy. This could impact investment decisions, consumer spending, and overall economic stability in the coming months.